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This is an account of the major events that led up to the 2008 financial meltdown, the causes of which are extremely complex and multi-faceted. Our story begins in the late 1970’s, just as the baby boom generation was growing up and beginning to want homes of their own. Unless you were extremely wealthy to the point where you could pay the total cost of your new home with the cash in your bank account, you would need to borrow money in the form of a mortgage, which is a loan that can be paid back over the course of 30 years or so. However, because of the unprecedented size of the baby boom generation- “there were 76 million births between 1949 and 1964- many economists worried that there wouldn’t be enough capital to fund all their mortgages” (5). That all changed with the invention of something called the ‘mortgage-backed security’ in the late 1970’s by Lewis Ranieri of the Salomon Brothers firm in New York. The mortgage-backed security, according to All The Devils Are Here, “allowed Wall Street to scoop up loans made to people who were buying homes, bundle them together by the thousands, and then resell the bundle, in bits and pieces, to investors” (4). Basically, the effect that this had was to make a very risky investment (30-year mortgages) seem less risky to investors. Through a process known as “securitization”, Wall Street firms became able to essentially convert a very risky mortgage into a much less risky bond. The mortgage bond that resulted could then be split up into pieces and sold to investors, piece-by-piece. If that sounds confusing, that’s because it is!

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This is an account of the major events that led up to the 2008 financial meltdown, the causes of which are extremely complex and multi-faceted. Our story begins in the late 1970’s, just as the baby boom generation was growing up and beginning to want homes of their own. Unless you were extremely wealthy to the point where you could pay the total cost of your new home with the cash in your bank account, you would need to borrow money in the form of a mortgage, which is a loan that can be paid back over the course of 30 years or so. However, because of the unprecedented size of the baby boom generation- “there were 76 million births between 1949 and 1964- many economists worried that there wouldn’t be enough capital to fund all their mortgages” (5). That all changed with the invention of something called the ‘mortgage-backed security’ in the late 1970’s by Lewis Ranieri of the Salomon Brothers firm in New York. The mortgage-backed security, according to All The Devils Are Here, “allowed Wall Street to scoop up loans made to people who were buying homes, bundle them together by the thousands, and then resell the bundle, in bits and pieces, to investors” (4). Basically, the effect that this had was to make a very risky investment (30-year mortgages) seem less risky to investors. Through a process known as “securitization”, Wall Street firms became able to essentially convert a very risky mortgage into a much less risky bond. The mortgage bond that resulted could then be split up into pieces and sold to investors, piece-by-piece. If that sounds confusing, that’s because it is!